Boy, oh boy, you know it’s August when this is a Bloomberg “headline”:
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DUNKIN' COLD-BREW COFFEE LAUNCH WAS `VERY STRONG’
Fantastic. We’re not sure what the counterfactual there would be (maybe “Dunkin’ says cold-brew launch was complete dud”), but hopefully this market will get some caffeine next week once everyone has the weekend to decode Yellen’s Jackson Hole speech.
We’re going to close red, which is fine because it doesn’t really matter. 70 points on the Dow? Who cares? Just call it a “mixed” session. After all:
There’s a Monty Python reference for all the fans out there.
It’s so funny because everyone likes it when their financial assets appreciate. But we can’t think of any other time in recorded history when investors were actually hoping for a “correction.” Something just doesn’t “feel” right. And that’s because something just isn’t “right.”
We’re trading a market that’s basically at all-time highs in an environment where inflation is subdued, global trade is set to flatline, and everyone is completely reliant on China who - bless their “red” hearts - are trying their damnedest to keep the charade going by reporting 6.5-7% GDP growth even though everyone knows that’s a fantasy. To continue with the Monty Python reference: “It’s a flesh wound.” No it’s not. It’s a collapse of the industrial sector and a decline in global demand for commodities. It’s a disaster. And if the NBS were reporting real numbers, Chinese growth would probably be somewhere in the neighborhood of 2%, in line with the rest of the developed word (why do we continue to refer to them as an “emerging market”?).
Anyway, gains are gains. And anyone who’s been brave enough to stick around this long has continued to incrementally add a few points (one “red” day notwithstanding) to their portfolio. But take it from us, a VIX 11-handle is scary as hell in this environment.
But hey, if you’re a professional - or if you’re otherwise inclined to take the leap and become an FX trader - there are opportunities going into Jackson Hole, and Goldman’s FX team is happy to tell you about them. Here are some excerpts from a note out Wednesday:
“Markets are navigating a relatively calm week, with the Dollar having gone into a holding pattern following its roughly three percent weakening on dovish Fed-speak in recent weeks. Our read on recent communications is that they have conflated two issues that in principle are quite distinct: (i) the timing of the next Fed hike; and (ii) the magnitude of the overall Fed hiking cycle. The two should in principle be quite separate, given that even the most ardent proponents of low R-Star see the current stance of monetary policy as accommodative, so that there shouldn’t really be all that much disagreement on the need to hike near term.”
“All this came to naught, however, when the June meeting was a dovish surprise, with a sharp downgrade in the longer-run dots. Against this background, we today take an agnostic look at which Dollar crosses respond most to Fed surprises. To do this, we examine the partial correlation of key Dollar crosses with the two-year interest differential, controlling for things like oil price swings and global risk appetite. We find that GBP/$, $/JPY and NZD/$ should react most in the event of a surprise on Friday.”
(Charts: Goldman)
Allow us to enlighten you. The biggest “surprise” on Friday would be in S&P 500 futures. Sure, there would be some outsized moves in USD that if you are skilled, you can take advantage of - an if that’s you, then more power to you. But if she says anything - and we mean anything - that definitively suggests September is on the table, well then you can kiss ES goodbye.
As always, trade accordingly.